Retail method of inventory;

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58 H A S K I N S & S E L LS August
The Retail Method of Inventory
THAT correct statement of net income
for a period in most manufacturing
and trading concerns is dependent on
proper valuation of merchandise inven­tories
at the beginning and end of the
period is axiomatic. That reliable inven­tory
data are necessary in preparing
balance sheets to be used as a basis for
credit, and in maintaining effective control
over stocks also is self-evident.
Incorrect statement of inventories fre­quently
has results more far-reaching in
effect than mere inflation of the book profit
for one period and diminution of that for
another period. It may affect the amount
of income taxes paid, particularly as be­tween
two periods of differing tax rates;
or the amount of bonuses payable to em­ployes,
especially where a sliding scale is
used in computing the bonuses. Financial
statements containing improper inventory
valuations may indicate false trends, and
become a basis for misguided policies.
Hence the necessity for statements of
inventories in which the number of units
is correct, the valuations proper, and the
arithmetical computations accurate.
Conditions surrounding the World War
—a period of rapidly rising prices and in­flation,
followed by a period of even more
rapidly declining prices and depression—
served to focus attention on the inven­tory
problem. The situation was accen­tuated
by the advent of the income tax
and the high rates then prevailing. Modern
business conditions—the vast size of indi­vidual
business units, and increased com­petition
with their attendant problems—
also have tended to draw attention to the
inventory question, by way of demanding
more accurate and complete financial and
operating data for purposes of control and
administration.
In the retail field, particularly in the case
of department stores, the so-called retail
method of inventory has come to the fore.
Evidence indicates that various features of
this plan, in one form or another, have
been in use by certain concerns for a num­ber
of years. It is only recently, how­ever,
that the method has come into very
general use. Provision for the use of the
retail method of inventory now is embodied
in the "Standard Method of Accounting
for Retail Stores" prepared by the Con­trollers'
Congress of the National Retail
Dry Goods Association. The principles of
the scheme have been accepted by the
Treasury Department, and taxpayers to
whom the retail method applies may fol­low
it in the preparation of Federal income
tax returns, provided they observe the
general principles of the plan, and adhere
to it consistently from year to year.
The main feature of the retail method of
inventory is that it provides that inven­tories
be taken at selling prices, and re­duced
to a cost basis by deducting from
the total the amount of mark-up (margin
added to cost in order to fix selling price)
applicable to the goods in question; this
being determined by applying to the total
of the inventory at selling price the per­centage
of mark-up contained therein as
ascertained from experience. In its
broader sense, however, the plan is really
a method of accounting for merchandise,
in that it contemplates the accumulation
of data during a fiscal period which will
enable the management to maintain an
effective stock control. It further pro­vides
a book inventory which may be used
to prepare financial statements at more
frequent intervals than physical inventory
times, and to ascertain whether a stock
shortage exists when a physical count is
made.
The following form, taken from the uni­form
system above referred to, shows the
operation of the method. The spaces
filled with an 000 00 are not used.
It should be understood that a separate
computation is made for each department
or class of goods. In a department store,